Australia’s Big Four banks could end the practice of discounting offered mortgage rates to their customers, as they seek to lessen the impact of higher wholesale funding costs.

The banks are hoping that ending the practice of discounting will enable them to avoid having to raise interest rates, and pass costs of to customers during an election year.

The banks face intense pressure from the government not to raise rates out of synch with the Reserve Bank of Australia cycle despite the fact that the European Sovereign Default crisis has resulted in a widening in funding costs.

Phil Chronican, chief executive of ANZ Australian operations said in an interview with The Australian that lenders have already begun to make changes to their mortgage offerings. Many lenders have resorted to reducing brokerage commissions as a means of easing the impact of the current margin squeeze.

ANZ, whose mortgage book is valued at some $140 billion has seen losses as high as $40 million as a result of tighter margins caused by higher wholesale funding costs and intense domestic competition for retail deposits.

According to Australia’s second largest lender, Westpac, the estimated 15 basis point erosion in margin the lender experienced during the first half of the current year, as cost it approximately $120 million on its mortgage book, valued at approximately $250 billion.

ANZ’s Chronican said it was increasingly likely that domestic banks would begin restructuring their “value-based pricing” of mortgages, and that would entail reductions on discounts of the average standard variable rates offered to both new and existing customers.

“The banks offer discounts based on the valuation characteristics of a loan. In the future we may see that being used differently by banks as they fine tune their home loans,” Mr Chronican said. “At the moment, the discounts usually apply to people with a reasonably high income and they have equity in their existing home — there is a lot of different pricing out there.”

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